Soverign Debt Growth Speeds Up

All Americans should be alarmed at this disturbing turn of events. It signals an accelerated pace toward our nation’s permanent economic decline.

The national debt has grown by $486 billion so far this year. U.S. sovereign debt, however, has grown even faster – $503 billion. That projects to about $1.34 trillion in new sovereign debt growth for 2012.

In 2001 U.S. sovereign debt was $3.4 trillion. Today it’s grown over 3 times that size to $11 trillion!

This new wrinkle in U.S. federal government debt is a big deal.

Sovereign Debt vs. National Debt

Everyone has heard of the national debt. Right now it’s $15.7 trillion… an unimaginable sum. It’s spoken of in uneasy, hushed tones. How will we ever get it under control?

But the national debt is not what Americans should be concerned most about. What we should be concerned about is sovereign debt. They are two different things.

Sovereign debt is much worse. Our sovereign debt is nearly $11 trillion… and growing faster than the national debt.

Excessive sovereign debt is what destroys economies and topples governments. For proof look no further than Europe. Over the last 2 years or so at least 18 European governments have fallen, mostly because of debt driven economic crisis. Two of them, France and Greece, fell so far this month.

You see, sovereign debt is what a government owes to outside creditors. Become a bad credit risk and the cost of borrowing becomes prohibitive and economic havoc follows. That is what is strangling Europe right now.

How Does Sovereign Debt Grow Faster than the National Debt?

Typically, a government’s total national debt is the sum of its sovereign debt and its internal debt. Internal debt is what a government borrows from itself, like from the Social Security trust fund.

If a government’s sovereign debt grows and its internal debt shrinks then sovereign debt grows faster than the total national debt. That is what is happening this year. Our government calls internal debt “intragovernmental holdings”.

Internal debt is shrinking because the payroll tax holiday was extended through the rest of 2012. The $120 billion payroll tax cut for 2012 otherwise would have been taxed income that got borrowed, spent and added to internal debt.

The size of “intragovernmental holdings” is regulated by two factors:

Internal borrowing increases it

Bonds paid off decreases it

Because payroll tax collections are $120 billion light this year that is $120 billion less used to finance internal debt. The amount of bonds purchased from internal borrowing was less than the amount paid off, thus reducing internal debt.

Conclusions

Perhaps for the first time since WWII, sovereign debt is growing faster than the national debt.

Estimated federal tax collections for 2011 is $2.3 trillion. $454 billion – a whopping 19.7% of total revenues – went to pay INTEREST on the national debt.

Not all that interest serviced sovereign debt. Some interest payments are good and go to the Social Security and Medicare trust funds, for example. But a larger and larger amount of that interest is going to service sovereign debt.

It is the fundamental fiscal problem of our era. It is not to late to fix things if we confront our sovereign debt head-on in a responsible way.

This should be a wake-up call slapping us across the side of the head telling us that time is running out for us to get back to a healthy, growing economy.

Of more immediate importance, though, is nobody knows how Taxmageddon 2013 will get resolved. That will have a far greater impact on long-term sovereign debt growth after this year than anything else. Neither Congress nor the President seem much inclined to do anything at the moment. The outcome of the November elections will play a central roll in that resolution.

This is certain… there will be tax increases next year. Sovereign debt growth will slow temporarily.

We face the largest tax increase in U.S. history in 2013… 3.5% of GDP! That would help lower sovereign debt, of course, until it chokes off economic growth severely later in 2013.

Great Chart. Nothing wrong with borrowing money at near zero percent and investing in something with a solid ROI. Problem is the near zero interest rates wont last making this problem loom larger and larger from a service the debt angle, and then we all know alot of stimulus was spent on projects with zero or little ROI. You write well and get to the essence of the macroeconomics that we face.

I wish the federal government understood something, ANYTHING, about macroeconomics. It doesn’t. To it, everything is politics.

How do we help them out?

Thanks for noticing my chart… I updated a spread sheet I’d previously made to produce it. I had to scarf the sovereign info – data element by data element – off Treasury data at fiscal year end using one of my favorite reports… Treasury’s “Debt to the Penny” report. Its flexibility makes it my favorite Treasury report. 🙂

It only goes back to 1997 because Treasury online data only goes back that far… I wanted to go all the way back to 1950.